Consulting Payments to Foreign Bank Account Subject to Income Tax

May 3, 2011, 3:46 PM

On April 21, 2011, the US Tax Court held that an individual (the "Taxpayer") convicted of tax evasion was liable for income taxes on payments representing consulting fees that the Taxpayer had delivered to multiple Swiss bank accounts of a corporation controlled by the Taxpayer. In 1993, the Taxpayer formed a British Virgin Islands corporation (the "Corporation") and opened bank accounts in Switzerland in the name of the Corporation. The Taxpayer provided consulting and other services to various companies and governments and requested that his clients transfer the money representing payment for those services to the Corporation's accounts in Switzerland. From 1993 through 2000, the Taxpayer failed to include those amounts as income in any of the Taxpayer's tax returns. In 2003, the Taxpayer pled guilty to tax evasion for those years. The IRS sought to hold the Taxpayer liable for tax on all of the payments made to the Corporation's bank account for the Taxpayer's services but the Taxpayer contended that only the investment income earned each year by the accounts should be taxed and that the consulting fees should not be taxed until those amounts are distributed to him. The Tax Court noted that all amounts deposited to the Corporation's accounts during that timeframe were received for services that the Taxpayer rendered to third parties. Furthermore, the Tax Court noted that the Taxpayer admitted that the Corporation's accounts were opened for the express purpose of holding funds and income received by the Taxpayer and that the usage of the Corporation was an impermissible assignment of income. Click here for a complete review of the opinion, including additional discussion regarding other issues that were decided. --Elaina L. Blanks